A170121/Q/6/P20006

The Federal Acquisition Service’s Reporting of Small Business Procurements Contained Significant Inaccuracies

Report Number A170121/Q/6/P20006 September 14, 2020

Office of Audits Office of Inspector General U.S. General Services Administration

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Executive Summary The Federal Acquisition Service’s Reporting of Small Business Procurements Contained Significant Inaccuracies Report Number A170121/Q/6/P20006 September 14, 2020 Why We Performed This Audit We performed this audit based upon previous preaward contract audit work that identified a small business award in which the work was primarily performed by a large business. Our objective was to determine if the Federal Acquisition Service (FAS) properly identifies and reports small business procurements in accordance with the Federal Acquisition Regulation. What We Found To determine if FAS’s reporting of its small business procurements was accurate, we sampled procurements that FAS identified as small business in Fiscal Year 2016 and Fiscal Year 2017. We found that FAS’s reporting of small business procurements contained significant inaccuracies. We identified $89 million in procurements erroneously recorded as small business in the Federal Procurement Data System–Next Generation. While Federal Acquisition Regulation 4.604, Responsibilities, specifies that the awarding contracting officer has the responsibility to accurately identify and report small business procurements, Federal Procurement Data System–Next Generation limitations do not allow contracting officers to accurately report small business procurements at the task order level. In addition, FAS’s small business procurement reporting does not identify the extent of the work performed by large businesses. We found approximately $120 million of small business procurements in which large businesses performed a portion of the work. Because there is no requirement for small businesses or FAS to report how much of the work is performed by large businesses, the reported information may not provide an accurate assessment of FAS’s small business procurements.

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What We Recommend We recommend that the FAS Commissioner:

1. Address the Federal Procurement Data System–Next Generation limitations to ensure that contracting officers can accurately identify, and the data will accurately reflect, small business procurements.

2. Hold discussions with the Small Business Administration to consider if changes should be initiated to require reporting of subcontracting and reseller work for small business procurements.

The FAS Commissioner partially agreed with Recommendation 1 and agreed with Recommendation 2. FAS contends that its small business procurement reporting was in accordance with current regulations and Federal Procurement Data System–Next Generation limitations. However, the data reported is inaccurate, which is not in accordance with the Federal Acquisition Regulation as noted in the report. FAS agreed to provide a corrective action plan to address both recommendations. FAS’s response is included in its entirety in Appendix B.

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Table of Contents Introduction ..................................................................................................................... 1

Results

Finding – FAS’s reporting of small business procurements contained significant inaccuracies. ............................................................................................................. 3

Conclusion ........................................................................................................................ 6

Recommendations .................................................................................................................... 6

GSA Comments .......................................................................................................................... 6

Appendixes

Appendix A – Scope and Methodology .......................................................................... A-1

Appendix B – GSA Comments ........................................................................................ B-1

Appendix C – Report Distribution ................................................................................... C-1

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Introduction We performed an audit of the Federal Acquisition Service’s (FAS’s) identification and reporting of small business procurements. Purpose We performed this audit based upon previous preaward contract audit work that identified a small business award in which the work was primarily performed by a large business. Objective Our objective was to determine if FAS properly identifies and reports small business procurements in accordance with the Federal Acquisition Regulation (FAR). See Appendix A – Scope and Methodology for additional details Background Maximizing contracting opportunities for small businesses is a priority throughout government. In 1953, Congress created the Small Business Administration (SBA) to assist and protect the interests of small business concerns and ensure that a fair portion of federal purchases and contracts be placed with small businesses. In 1988, Congress established an annual government-wide goal for contracting directly with small businesses. Currently, the goal for contracting to small businesses is 23 percent of all government procurements. Each year, the SBA works with federal agencies to set additional agency-specific small business procurement goals. In an effort to meet established small business contracting goals, FAS awards contracts to small businesses to fulfill its own and customer agency procurement needs.1 During Fiscal Years (FYs) 2016 and 2017, $3.7 billion of FAS procurements were reported as small business procurements. The SBA is responsible for establishing small business size standards for categories of products and services. These categories have unique numerical codes defined under the North American Industry Classification System (NAICS). When a federal agency solicits for a product or service, it lists the required NAICS code(s) in its solicitation. A business responding to the solicitation must represent itself as either a small or large business for the solicited NAICS code(s). This designation is based on a business’s self-certification in the federal government’s System for Award Management for each NAICS code it offers. The maximum size standards governing eligibility for small business procurements vary among the NAICS codes.2 The maximum size 1 FAS procures for itself and on behalf of other federal agencies through the Office of Assisted Acquisition Services. 2 As a result, the same business can be designated as small business for some NAICS codes and a large business for others.

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standards are based on either: (1) the number of employees or (2) average annual gross revenues. The contractor determines which size standard it is certifying as small business. Agencies must report all contract actions in the GSA-managed Federal Procurement Data System–Next Generation (FPDS-NG). Acquisition agencies are required to enter all contract information into FPDS-NG at the time of award; therefore, FPDS-NG is the main source for tracking and storing all government procurement data. The SBA uses FPDS-NG data to track agencies’ progress toward meeting small business contracting goals and provides Congress with a Small Business Goaling Report annually. FPDS-NG data is also used to create other reports related to small business procurements that are provided to the President, Congress, and the public.

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Results Maximizing contracting opportunities for small businesses is a priority throughout government. In an effort to meet its small business contracting goals, FAS awards contracts to small businesses to fulfill its own and customer agency procurement needs. To determine if FAS’s reporting of its small business procurements was accurate, we sampled procurements that FAS identified as small business in FY 2016 and FY 2017. We found that FAS’s reporting of small business procurements contained significant inaccuracies. We identified $89 million in procurements erroneously recorded as small business in FPDS-NG. While FAR 4.604, Responsibilities, specifies that the awarding contracting officer has the responsibility to accurately identify and report small business procurements, FPDS-NG limitations do not allow contracting officers to accurately report small business procurements at the task order level. In addition, FAS’s small business procurement reporting does not identify the extent of the work performed by large businesses. We found approximately $120 million of small business procurements in which large businesses performed a portion of the work. Because there is no requirement for small businesses or FAS to report how much of the work is performed by large businesses, the reported information may not provide an accurate assessment of FAS’s small business procurements. Finding – FAS’s reporting of small business procurements contained significant inaccuracies. Inaccurate Identification and Reporting of Small Business Procurements in FPDS-NG Due to inaccurate NAICS codes, FAS identified and reported four task orders valued at $89 million as contract awards to small businesses although they were actually large business procurements. NAICS codes are used as a basis for determining whether a business is considered a small or large business. Each NAICS code has size standards that are used to determine eligibility for small business procurements. All government contractors report their status as a small or large business in the federal government’s System for Award Management based on the size standards applicable to the NAICS codes they offer. We identified 10 procurements totaling $274 million for which the NAICS codes in FPDS-NG did not match the NAICS codes on the contract award documents. Four of those ten procurements, totaling $89 million, were large business procurements identified inaccurately in FPDS-NG as small business procurements due to the wrong NAICS code. According to FAR 4.604, Responsibilities, the awarding contracting officer has the responsibility to accurately identify and report small business procurements in FPDS-NG. Therefore, the contracting officer is responsible for ensuring the correct NAICS code is input into FPDS-NG.

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However, according to FAS officials and the FPDS-NG Data Dictionary, the incorrect NAICS codes for these procurements are due to a system limitation within FPDS-NG. FPDS-NG pre-populates the NAICS codes for task orders using the NAICS code for the base contract and does not allow contracting officers to modify the NAICS codes, even when the code is inaccurate. The four procurements identified above were task orders placed against base contracts, but were awarded using a different NAICS code. As described by FAS officials and the FPDS-NG Data Dictionary, FPDS-NG pre-populated the task orders with the NAICS code for the base contract and, although the codes were incorrect for the task orders, the system does not allow the pre-populated NAICS code to be corrected. As a result of incorrect NAICS codes identifying the task orders as small business procurements in FPDS-NG, these procurements were misreported and FAS’s small business procurements were overstated by at least $89 million for FY 2016 and FY 2017. Reporting of Small Business Procurements Performed by Large Businesses According to FAR 19.202-5, Data collection and report requirements, agencies must accurately measure small business participation in their acquisition programs. However, there is no requirement or reporting mechanism to provide visibility into the amount of small business awards that are performed by large businesses. As a result, FAS reporting of small business procurements does not reflect that at least $120 million of contracts designated as small business awards were fulfilled by large businesses. FAR 19.702, Statutory requirements, requires large business contractors to report their subcontracting activities and dollar values. The federal government uses the Electronic Subcontracting Reporting System to track and report the amount of small business participation in government contracting that is achieved through large business subcontracting to small businesses. However, there is no similar requirement for small businesses to identify and report activities and amounts of work they subcontract to large businesses. As a result, FAS reporting of small business awards designates contracts as small business awards even when they are performed in part or even mostly by large businesses. While examining FAS’s reported small business procurements for FY 2016 and FY 2017, we identified five small business procurements (totaling approximately $308 million) where three of the small businesses subcontracted at least 25 percent of the work ($76 million) to large businesses, yet the entire $308 million was reported as small business. We also reviewed 11 FAS procurements, with a total value over $46 million, to small businesses that resell items manufactured by large businesses. For these 11 procurements, we determined that large businesses actually performed between 94 to 99 percent of the work. The small business resellers in these procurements performed limited administrative functions only. As a result, reporting the entire $46 million as small business in FPDS-NG, while consistent with the reporting requirements, was misleading because at least $43 million of the $46 million was performed by large businesses.

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In total, we identified contracts worth at least $120 million reported as small business procurements, which were actually performed by large businesses. FAS officials advised us that the decision to report subcontracting and reseller work for small business procurements and how to report, is made by the SBA, as authorized by the Small Business Act and the Code of Federal Regulations.3 Because GSA does not have the authority to pursue policy changes on its own, FAS should discuss a policy change with the SBA that would result in more accurate information on the extent small business procurements are actually performed by small businesses.

3 13 CFR § 125.6.

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Conclusion To determine if FAS’s reporting of its small business procurements was accurate, we sampled procurements that FAS identified as small business contracts in FY 2016 and FY 2017. We found that FAS’s reporting of small business procurements contained significant inaccuracies. We identified $89 million in procurements erroneously recorded as small business in FPDS-NG. While FAR 4.604, Responsibilities, specifies that the awarding contracting officer has the responsibility to accurately identify and report small business procurements, FPDS-NG limitations do not allow contracting officers to accurately report small business procurements at the task order level. In addition, FAS’s small business procurement reporting does not identify the extent of the work performed by large businesses. We found approximately $120 million of small business procurements in which large businesses performed a portion of the work. Because there is no requirement for small businesses or FAS to report how much of the work is performed by large businesses, the reported information may not provide an accurate assessment of FAS’s small business procurements. To address these issues, FAS should address the FPDS-NG limitations to ensure awards to small businesses are reported accurately and hold discussions with the SBA regarding reporting large business subcontracting and reseller awards to small businesses. Recommendations We recommend that the FAS Commissioner:

1. Address the FPDS-NG limitations to ensure that contracting officers can accurately identify, and the data will accurately reflect, small business procurements.

2. Hold discussions with the SBA to consider if changes should be initiated to require reporting of subcontracting and reseller work for small business procurements.

GSA Comments The FAS Commissioner partially agreed with Recommendation 1 and agreed with Recommendation 2. FAS contends that its small business procurement reporting was in accordance with current regulations and FPDS-NG limitations. However, the data reported is inaccurate, which is not in accordance with the FAR as noted in the report. FAS agreed to provide a corrective action plan to address both recommendations. FAS’s response is included in its entirety in Appendix B.

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Audit Team This audit was managed out of the Heartland Region Audit Office and conducted by the individuals listed below:

Michelle Westrup Regional Inspector General for Auditing Erin Priddy Audit Manager Shannon McKinzie Auditor-In-Charge

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Appendix A – Scope and Methodology Our audit evaluated if FAS properly identified and reported small business procurements in accordance with the FAR. To accomplish our objective, we:

• Reviewed background information related to small business government contracting and the FPDS-NG;

• Obtained all FAS small business procurements for FY 2016 and FY 2017 from FPDS-NG, totaling $3.7 billion;

o Evaluated a judgmental sample of the 30 largest small business procurements awarded by the FAS Office of Assisted Acquisition Service, totaling $752 million. This represents approximately 20 percent of small business awards during our review period based upon sales volume; and

o Reviewed GSA contract files and related correspondence for all small business procurements sampled;

• Reviewed the Small Business Act, FAR, and FAS internal policies governing small business procurements;

• Interviewed GSA contracting officials, small business contractors, and GSA Office of Small and Disadvantaged Business Utilization officials; and

• Held discussions with FAS Office of Acquisition Policy officials.

We conducted the audit between June 2018 and June 2019 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our finding and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our finding and conclusions based on our audit objective. Internal Controls Our assessment of internal controls was limited to those necessary to address the objective of the audit.

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Appendix B – GSA Comments

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Appendix B – GSA Comments (cont.)

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Appendix B – GSA Comments (cont.)

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Appendix B – GSA Comments (cont.)

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Appendix B – GSA Comments (cont.)

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Appendix B – GSA Comments (cont.)

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Appendix C – Report Distribution

GSA Administrator (A)

GSA Deputy Administrator (AD)

Commissioner (Q)

Deputy Commissioner (Q1)

Chief of Staff (Q0A)

Chief Administrative Services Officer (H)

Audit Management Division (H1EB)

Assistant Inspector General for Auditing (JA)

Director, Audit Planning, Policy, and Operations Staff (JAO)